Do You Need Gap Coverage for Your Auto Loan?

When you buy a new car it depreciates in value about 20% as soon as you drive it off the dealership lot. Your new car will continue to depreciate rather quickly – sometimes as much as 40%-50% in the first 3-5 years. If you were to get into an accident that totals your car, or have your car stolen during the first three years of owning a car, you are probably going to owe a lot more on your auto loan than the actual cash value of your car. That is where GAP insurance (Guaranteed Auto Protection) comes into play.

GAP insurance covers the difference between your car’s actual value and what you still owe on it. In most cases*, regular car insurance is going to pay you the actual cash value – not the amount you still owe. It’s up to you to pay the difference to the lender of your auto loan. If you have GAP insurance, that will kick in and pay the difference so you don’t have to.

*Some auto insurance policies indicate they will pay off the “full replacement cost”; or “new car replacement” in the event a car is stolen or totaled. People with this type of car insurance do not need additional GAP insurance, since it’s included in their regular policy.

Who Should Get GAP Insurance?

GAP coverage would be handy here

There are a few situations when GAP insurance is recommended, because you will almost always be upside down on the car loan in these situations, including:

if you make a down payment on a new car of less than 20% (since your car will depreciate this much the moment you drive away from the dealership).

If you are trading in a car that you owe more than you get for the trade-in (negative equity) into the new auto loan.

If you spread the cost of the car out over 72 months or longer.

If you are leasing a car rather than buying a car. (Most car lease contracts include GAP coverage, but check your lease agreement to be sure).

Types of GAP Insurance Coverage

There are three categories of GAP insurance coverage. Licensed agents offer GAP Insurance as part of your regular car insurance policy, while others offer it as an additional product you can purchase even if you don’t use that company for your primary car insurance policy. Sometimes dealerships also offer GAP Insurance coverage.

A GAP Waiver is an agreement between the car dealership or auto loan lender (could be the bank, maker of the automobile, credit unions, etc) and you. It will waive the difference between the actual car value and the balance of the loan. You still need an actual car insurance policy. If you include a GAP Waiver as part of your auto loan, you’ll pay interest on that price over the course of the loan, too.

A GAP Endorsement is for people who have auto insurance policies that do not include provisions to cover the difference in what you owe and what the car is worth. It’s like adding a rider or amendment to the insurance policy in order to include the coverage.

Is GAP Insurance for you? GAP coverage isn’t required for everyone, particularly if you pay cash for a car, or buy a used car that won’t depreciate much after you buy it. GAP insurance coverage is the same as any other type of insurance you may buy. You buy it “just in case,” but you hope never to use it. If you don’t use it, you don’t get your money back. If you do end up with a totaled car or a stolen car in the first few years of owning the car then the few hundred dollars spent on the coverage may save you thousands.

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Ryan Guina is the founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.
Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.
Ryan uses Personal Capital to track and manage his track his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

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Comments

I’ve only purchased one new car but I’ve never purchased GAP coverage either. When I bought my new car I had a trade in that was paid off and worth 1/3 the purchase price, and I put another 1/3 down in cash, so it wouldn’t have made sense for me to purchase GAP. I’m in the same boat as you though -I don’t intend to finance another car again, even though it worked out in the situation I outlined (I still drive the car 5.5 years later and I plan on keeping it a lot longer). The only other vehicles I’ve purchased have been used. But GAP coverage could help people in certain circumstances.

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